We are reducing our rating on Unibanco Uniao de Bancos Brasileiros SA (UBB) to Hold from Buy following the merger agreement with Banco Itau Holding Financeira S.A. (or Itau) (ITU).

On November 3, 2008, UBB and Itau announced a merger, creating the largest bank in Brazil, with R$575 billion in assets, 4,800 branches, and a 19% share of the Brazilian loan market. The transaction, expected to be completed in first half 2009, should be immediately accretive to earnings. Pro forma for the merger with Itau and based upon our current estimates, we expect net income in 2009 to increase 5% to R$11,351 million. However, we show a decline in US$ after taking into account the negative impact of foreign exchange adjustments.

In other news, UBB posted third quarter earnings of R$704 million, up 6% year over year and well below our estimate due to weaker-than-expected growth in net interest income. We are cutting our EPGDS estimates to $11.64 from $13.00 for 2008 and to $8.20 from $15.00 for 2009, reflecting sharp depreciation of the Brazilian real against the US$ and for 2008, the third quarter shortfall.

At its current price, Unibanco trades at 2.2X book value, or roughly in line with 2.3X book value established by its merger agreement with Banco Itau Holding Financeira S.A. (or Itau). We expect this book value relationship to continue until the merger is completed in the first half of 2009. Our $66.50 price target represents approximately 8X our 2009 earnings estimate of $8.20 per global depositary share.